NEW YORK (Reuters) - A New York state judge on Wednesday threw out billionaire hedge fund manager Louis Bacon's $100 million defamation lawsuit against Canadian fashion designer Peter Nygard, saying the case tied to their long-running feud over neighboring properties in the Bahamas belongs there.

Bacon, the founder of Moore Capital Management LP in New York, had accused Nygard in the lawsuit of engineering a "malicious" smear campaign against him including street rallies, bogus YouTube videos, and attempts to falsely link him to arson, bribery, drug smuggling, the Ku Klux Klan and murder.

That prompted Nygard, the chairman of Winnipeg-based Nygard International, to file a $50 million countersuit accusing Bacon of pursuing a "vendetta" against him.

Each man has denied the other's claims. Wednesday's decision may spell an end to the New York state court litigation.

Supreme Court Justice Cynthia Kern in Manhattan wrote that while Bacon is a New York resident, the Bahamas is a "more appropriate forum" for his case.

She said this was because most of the actions that Bacon accused Nygard of undertaking to further his alleged smear campaign occurred in the Bahamas, and most of the potential witnesses live there.

Bacon has opposed Nygard's effort to expand his property in the Bahamas' gated Lyford Cay community, following a 2009 fire.

Some environmental groups and residents have said an expansion may damage the surrounding ecosystem and beaches.

Kern's decision contains several conditions, including that Nygard submits to the Bahamian courts' jurisdiction and lets employees there be subpoenaed.

The judge said Bacon has already pursued nine legal actions in the Bahamas since 2011 against alleged co-conspirators.

A spokesman for Bacon said the fund manager disagrees with the decision and is "considering his appellate options," but remains "committed" to proving his claims in court.

"It is up to Mr. Bacon to decide whether he wants to start this process anew in the Bahamas," Aaron Marks, a lawyer for Nygard, said in a telephone interview. "Mr. Nygard would vigorously defend against such a case."

Bacon is worth $1.9 billion, according to Forbes magazine.

The cases is Bacon v Nygard et al, New York State Supreme Court, New York County, No. 150400/2015.